In 2018 mortgage interest rates were on a roller coaster. The year started with anticipation of 2 rate increases by the Federal Reserve and with mortgage interest rates at approximately 4.5% for a 30-year fixed rate.  There were 4 rate increases, which led to great controversy by the end of the year.  Beginning in April and through the summer mortgage rates rose at their fastest pace in years and topped out at 5.125% in September.  However, against the headwinds, September mortgage rates have steadily fallen and ended the year at their lowest level since the start of the year and at the beginning of 2019 are in the 4.7% range for a 30-year fixed rate mortgage.

 

In fact, despite steady climbing for the past two years, mortgage rates remain lower than they were during most of the recession and below average for the type of strong economic growth we’ve been experiencing.

As we enter 2019, the following housing agencies are forecasting the following rate for 2019.

Agency 30-Yr Rate 2019 Prediction
National Association of Realtors 5.3%
National Association of Home Builders 5.2%
Mortgage Bankers Association 5.1%
Freddie Mac 5.1%
Fannie Mae 4.8%
Realtor.com 5.5%
Average of all agencies 5.17%

 

These forecasts are largely based on the Federal Reserve’s current outlook for economic growth, inflation and unemployment. The Federal Reserve currently has set expectations for 2 rate increases in 2019.  However, they have hedged following the December meeting by stating that future rate increases would be dependent upon the data.

THE CASE FOR FLAT RATES OR POSSIBLE A DECREASE IN RATES

While the majority view is that mortgage rates will rise from one-half percent to one percent in 2019, there are a couple of scenarios that would slow down the increase or even lead to lower mortgage interest rates. According to the Federal Reserve projection, U.S. GDP growth will slow to 2.3 percent in 2019 from 3 percent in 2018.  The unemployment rate ended at 3.7 percent in 2018 and is expected to fall to 3.5 percent in 2019. Inflation was forecast to be 1.9 percent in 2018 and 2019.

However, many economists believe the economy is showing some weakness that has not been fully reflected in the data. And while there are few economists or analysts that are forecasting a recession in 2019, if economic growth falls below 2% then future rate increases would likely be paused.  Similarly, inflation has softened in recent months, and falling oil prices probably reduces the Fed’s sense of urgency about raising rates to prevent the economy from overheating.

If GDP growth or inflation comes in below targets or if unemployment rises it would likely pause Fed activity with regard to rate increases and under the right set of circumstances could lead to a decrease in rates. In either of these cases, mortgage interest rates would likely fall from the levels they were.

IMPACT OF RISING RATES

Home Prices

Home prices have surged in recent years, adding to buyers’ affordability woes. Although prices are still projected to go up in the year ahead, they’ll do so at a slower pace. Median existing-home price appreciation is expected to grow 2.2 percent in 2019, according to Realtor.com.  Freddie Mac predicts that home prices will finish 2018 up 5.1 percent over last year. Growth will moderate to 4.3 percent in 2019.

Real estate is local, so your area may see prices move higher or lower depending on demand and inventory levels.

Affordability

The combination of rising mortgage rates and higher prices mean home buyers are spending more. The root cause of the increased spending is the impact of inflation in the form of surging wage growth, which is the main cause of higher interest rates.  According to the Bureau of Labor Statistics, wage growth has reached its highest level since 2000.  In the big picture, rates are just catching up with a robust economy and there is no indication that the real estate market will falter any time soon.

To put this point in perspective according the Bureau of Labor Statistics, Consumer House-Buying Power Remains 2.2 times greater than January 2000.

Another factor that mitigates the affordability issue is the fact that rents are expected to begin rising again in 2019 due to demand from more renters.

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As has been the case for the past two years the prudent course of action if you are going to be in the mortgage markets is that the sooner you act you can avoid the volatility associated with the factors that impact mortgage rates.